Downtown Renaissance Drives El Paso Office Market, Multifamily Growth

Weststar Tower, which at 14 stories will be the tallest office building in downtown El Paso upon completion, symbolizes the growth and modernization of this submarket.

For decades, El Paso was a big, sleepy town nestled on the banks of the Rio Grande that relied on a slow-paced, but consistent economy.

In those days, housing was always affordable. Pricing levels for single- and multifamily properties were below national averages, but so too were wages. The city’s office market, which has traditionally served as a leading indicator for multifamily growth, hummed along without ever experiencing strong asset appreciation or interest from outside investors. Taken at face value, this activity would suggest that there was a firm ceiling for new development and rent growth for both of these markets.

Laura Salome, SVN/Fortune Real Estate

In recent years, however, El Paso natives have seen their city experience enormous growth fueled by exceptionally low crime rates and expanding population at Fort Bliss Army base. Development of both single- and multifamily product really took off between 2011 and 2014, causing rent growth to subside and vacancies to rise from 5 percent a few years ago to roughly 9 percent today.

The market returned to a more sustainable pace of new development in subsequent years. Looking ahead, the metro’s job growth should remain a factor of its population of military personnel and federal employees. As El Paso undergoes this transformation, the relationship between the city’s thriving downtown office market and rising pace of multifamily development becomes more pronounced.

Scorching Submarket

Downtown El Paso is hot. There is tremendous development and revitalization happening in this area, with new hotels, bars and restaurants popping up everywhere and many dilapidated buildings being renovated. Office users in El Paso want to be near retail and restaurants, much like their major market counterparts.

In addition, there is a visible movement among office users to heighten efficiency and take less space per employee. Flex and coworking spaces are rising in popularity, as are open, bullpen-like spaces. In these regards, El Paso’s office market is experiencing the same patterns of evolution as the office sectors of major markets.

The office sector, which comprises about 2,500 buildings totaling 23 million square feet, finished 2017 with a vacancy rate of approximately 5.5 percent, according to CoStar Group.

Tight vacancy and rent growth in the downtown area have prompted Hunt Cos. to develop the tallest office building in the city, the 220,000-square-foot Weststar Tower. The 14-story building is slated to be complete in 2020. In addition to this project, the El Paso Housing Authority has invested $40 million in renovating the iconic Blue Flame Building, which will be repurposed into a mixed-use property with office, retail and residential space.

Multifamily Impacts

Job growth in El Paso has traditionally been dominated by blue collar industries and government employees. To some extent this remains true today. But there has been an uptick in office-using jobs, which, combined with the rampant retail and hotel development downtown, is attracting younger residents to the city.

In recent years, El Paso has begun to see a surge in development of Class A multifamily product. Avalon West, a 262-unit community on the city’s northwest side, runs the gamut of Class A amenities: a pool, fitness center, picnic areas, clubhouse and pet park.

Overall multifamily vacancy in El Paso clocked in at just over 9 percent at the end of 2017, per CoStar. The metro’s Class B and C properties remain near full occupancy, driven by daily border crossings and relatively flat wage growth throughout El Paso.

Thus, it appears that the higher vacancy rate stems from a recent surge in development of Class A multifamily product. Developers of new apartment communities are targeting the same kind of tenant as Hunt Cos. with its new downtown office project.

In addition to the revitalization of downtown El Paso, the growth of the University of Texas at El Paso (UTEP) has been a driver of absorption of new, Class A multifamily product. The enrollment growth at the school, which now counts its student population at approximately 25,000, has also helped lower the average age of El Paso’s population to about 30.

Medical Office Growth

Medical office has become big business in El Paso, thanks to the entrance of more healthcare operators into the market in recent years. Dallas-based Tenet Healthcare Corp. opened a new campus in northwest El Paso within the last two years to service the University of Texas Tech at El Paso’s growing health sciences program. In addition, a new, $700 million, 1.1 million-square foot medical center is under construction at Fort Bliss and slated for a summer 2019 completion.

Medical office is essentially the only sub-type of office product that gets built on speculation in El Paso. Despite the fact that there remains a shortage of healthcare providers, we’ve seen physicians express interest in owning their own properties. Combined with the overall strong amounts of capital chasing the healthcare sector (on a national level), this trend is encouraging developers to take on riskier projects.

As El Paso looks to continue to grow, both its vibrant downtown area and its newfound supply of Class A multifamily product will play pivotal roles. The biggest threat to continued growth in both the office and multifamily market is the metro’s wage rate. Generally speaking, financing is available for new projects, but it is usually accompanied by more conservative loan structures due to concerns that flat wage growth will prevent developers from pushing rents.

— By Laura Salome, CCIM, managing director, SVN/Fortune Real Estate. This article first appeared in the April 2018 issue of Texas Real Estate Business magazine.